Fire & Flower has target cut by PI Financial

The stock is still a good option in the Canadian cannabis space but the disappearance of a revenue ramp in digital sales has PI Financial analyst Jason Zandberg rethinking his thesis on pot retailer Fire & Flower (Fire & Flower Stock Quote, Charts, News, Analysts, Financials TSX:FAF). In a Tuesday update to clients, Zandberg reviewed FAF’s latest quarterly numbers where top and bottom lines ended up below estimates.

Fire & Flower, which has over 90 cannabis stores in Canada and an online cannabis retail platform, announced its second quarter 2022 financials on Tuesday, coming in with revenue of $40.7 million and an adjusted EBITDA loss of $6.0 million compared to a gain of $3.1 million a year earlier. The topline was down six per cent year-over-year, with the company saying rising competition in the retail space was a factor.

“We continue to invest in our end-to-end Hifyre cannabis consumer technology platform and integrate our Wholesale and Logistics segment to deliver greater sustainable value across our business as one of the leading cannabis retailers,” said CEO Stéphane Trudel in a press release. 

“Alongside our strategic partner, Alimentation Couche-Tard, Fire & Flower remains focused on our long term, global outlook on technology-enabled cannabis retail both through our Spark Perks member program and Firebird rapid delivery service, which brings cannabis products to consumers’ doors within hours,” he said.

In May, Fire & Flower launched its Spark Perks Member pricing program in a bid to capture more of the market, with the results being an 18 per cent in annualized sales per store over the second quarter compared to the first quarter. For the month of July, FAF reported same store sales increasing by ten per cent. 

The company has also upped its game in terms of delivery, launching Firebird Delivery in May in seven Ontario cities and Pineapple Express, the company’s delivery and logistics subsidiary, in British Columbia in July.

“[W]e are thrilled to launch same-day delivery in the Vancouver metro market and next day to the province of British Columbia through our website and retailers across the province,” Trudel wrote in a July 13 press release. “Customers can expect the same excellent standard of service that has already been deployed in Ontario, with customers receiving their cannabis purchases to their doors in a matter of hours, in many cases.”

Looking at the Q2 numbers, Zandberg said the $40.7 million in revenue was below analysts’ consensus forecast at $46.6 million, while the negative $6.0 million in EBITDA was also lower than the Street’s call for negative $2.1 million.

Revenue by segment had Fire & Flower posting $30.4 million in Retail compared to $31.8 million a year earlier, $8.5 million in Wholesale compared to $7.8 million a year earlier and $1.9 million from its Digital Platform compared to $3.7 million a year earlier.

Zandberg said the overall impact of the quarterly results were a “Negative” and he honed in on the waning digital sales.

“The drop in digital revenue has changed our investment thesis for FAF — digital revenue peaked in Q4 at $4.1 million and has subsequently dropped to $2.9 million in Q1 and now $1.9 million in Q2,” Zandberg wrote.

“We had expected this segment to double each year in our forecast period. We recognize that retail revenue was better than expected and this segment may have reached an inflection point and should replace some lost growth,” he said.

Zandberg did note that Retail revenue was up sequentially even with fewer stores (FAF dropped five retail locations over the quarter), saying the member programs were “providing a roadmap to ensuring a stronger figure year-over-year going forward.”

Nevertheless, with now two quarters of declining digital revenues, Zandberg has retooled his forecast for FAF. He is now calling for full 2022 revenue of $171 million (previously $208 million) and 2023 revenue of $190 million (previously $265 million). On earnings, he is forecasting EBITDA of negative $12 million for 2022 (previously positive $11 million) and $21 million for 2023 (previously $38 million).

“The digital revenue had contributed the majority of our EBITDA in FY22 and FY23 due to its superior margin profile relative to retail and wholesale revenue. It should be no surprise that our EBITDA estimates have taken a steep decline,” Zandberg wrote.

The result for Zandberg is a drop in his projected target price for FAF. With the update, Zandberg reiterated a “Buy” rating while moving his target from $20.00 to $5.50, which at press time implied a 12-month return of 147 per cent.